The low-cost angle

A global company

The bright, blocky blue-and-yellow logo of Ikea is among the most recognized of global brands, and the company’s Scandinavian modern designs and low prices inspire equal parts adoration and loathing around the world. To its fans, Ikea represents affordable luxury with high-end modern-design housewares for all. To its detractors, the company is nothing more than a classic big-box store, pushing bland, mass-market goods that consumers don’t need.

No matter which camp one is in, it’s plain that a focus on low-cost is what drives the engine of IKEA’s business. The company sets price-reduction targets for its products, and to reach those goals the company aims to cut 3 percent – 5 percent from its costs to produce and deliver those products each year. It’s willing to go to great lengths to achieve its reductions goals—even if it means redesigning products, overhauling the manufacturing techniques used for individual items and shortening supply chains.

That kind of aggressive cost-cutting largely centers on reducing waste of some kind, whether that means setting up shop close to shipping ports and rail terminals to reduce transportation costs or limiting the color choices for its products (blue pigments are cheaper than red, for example), or insisting that its products be flat-packed to maximize use of cargo space.

Such decisions often have environmentally beneficial side effects—but even in the case of its social and environmental responsibility programs, Ikea’s low-cost orientation seems to drive its priorities and investments.

Penny-pinching for the planet
In 2007, Ikea reported sales of 19.8 billion euros ($27.9 billion) to more than 500 million customers worldwide. It continues to expand globally on target, according to Mikael Ohlsson, Ikea’s president and CEO, who has attributed Ikea’s success in part to the decline in sales of its U.S. competitors. (Linens’n’Things, for example, in 2008 filed for Chapter 11 bankruptcy and closed almost 300 stores.)

Ikea, which has 285 stores in 36 countries, has in recent years developed a reputation as a leader in sustainability, due in part to a 2006-2009 sustainability plan, which set targets for responsible forestry, investments in clean energy and green building, and reductions in greenhouse gas emissions. Its Its IWAY (pdf)—IKEA Way on Purchasing Home Furnishing Products—code of conduct sets minimum requirements for suppliers in these key categories. And look closely at the company’s goals, and you’ll notice that many of its targets fit neatly into Ikea’s waste-not, want-not approach to business.